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E-Commerce FDI Policy: Bored Game

In a magical move, the Indian government has both outlawed private label sales by e-commerce platforms and said private label sales are not restricted.

Yes, India’s foreign direct investment policy for retail has, for many years, spoken in two tongues. And complying with it is like playing Snakes and Ladders. Chances are today’s policy changes may take you close to the top and tomorrow’s press note may drop you in the jaws of death.

Mostly because FDI policy in India is caught in this self-serving downward spiral of trying to protect voter bases and domestic incumbents while also trying to attract foreign investment.

Nothing wrong with that if all interests were balanced in a transparent, consistent manner.

But the piecemeal, rent-seeking approach of successive governments has created a right honest mess.

2014: Then it allowed 51 percent FDI in multi-brand retail but a government change ensured that remained a policy only on paper.

2016: The new NDA government then allowed 100 percent FDI only in e-commerce marketplace sites, shutting the door on inventory-based models but leaving a window open for line-blurring elements like private label sales. (Private labels are goods sold under the retailer’s brand.)

2018:Last week the government issued a new rule to shut the window on private labels but kept the vents open.

2019: And on Thursday, the government issued a clarification that said that private labels sales are not banned.

Devil’s Always In the Details

Between every policy change thrives a subculture of opaque structures that count on the government turning a blind eye.

For instance, in 2016 when the policy outlawed private labels – it did a half-baked job.

It said an e-commerce marketplace (with foreign investment in it) could not own or control inventory, nor sell more than 25 percent of any supplier’s goods.

This was prompted by the government position that FDI is permitted only in e-commerce marketplace sites, not in inventory based models and private label sales fit the latter model.

But the wording of the policy gave enough scope to e-commerce marketplace sites to sell private labels owned by companies in which they had an equity stake but no ownership or control. Sure enough, both Amazon and Flipkart retail private labels owned by companies in which they have equity stakes. The two have 30 private labels covering 200 different categories in India, Business Standard reported.

Last week’s new rules clamped down on such equity stakes, effectively ringing the death knell for private label sales on e-commerce marketplaces sites. Again, the language is not definite.

...an entity having equity participation by e-commerce marketplace entity or its group companies….will not be permitted to sell its products on the platform run by such marketplace entity.

Press Note 2 - DIPP, Ministry of Commerce & Industry

But what about indirect equity participation? Why hasn’t the policy explicitly barred “direct and indirect equity”. After all, in the same government notification, in another provision, it specified “direct or indirect equity”. So why not here?

This missing nuance, deliberate or otherwise, may allow private label sales to continue if the brands are owned by companies that are step-down subsidiaries or second-level joint ventures of the e-commerce marketplace.

Also the prohibition is only on “equity participation”.

Are convertible preference shares, debentures or warrants also considered equity, posed a recent note by law firm ELP.

The FDI Policy defines ‘capital instrument’ as referring to equity shares, CCPS, CCDs and warrants. It is therefore unclear whether the term “equity participation” refers solely to equity investments or whether it includes investments using other instruments (such as CCPS, CCDs or warrants) as well.

ELP Note

These are not obscure details – in being prescriptive in the past, FDI policy itself has created all these distinctions. Now it can’t escape that specificity.

To make matters worse, on Thursday the government issued a clarification that simply reiterated the policy position.

That means, no equity participation in suppliers selling on the platform, hence no private label sales.

But regarding private labels the clarificatory note said “present policy does not impose any restriction on the nature of products which can be sold on the marketplace”.

That means, no equity participation in suppliers selling on the platform but no ban on private label sales.

Why Is FDI Policy Second Guessing CCI?

This private label confusion is just one problem with the new policy. It has also disallowed e-commerce marketplaces from offering discounts and striking exclusive deals with certain suppliers.

One can still try and wrap one's head around the discount bit. A marketplace is just a meeting place for sellers and buyers. If the seller wants to offer a discount, fine. But if the marketplace starts discounting some products, the concept stands corrupted. Maybe. It’s thin but it’ll stand if you don't blow too hard.

But what’s with the ban on exclusive deals? Why can’t an e-commerce marketplace woo some sellers to sell exclusively on its platform? How’s that against the spirit of a marketplace?

Besides, discounts and exclusive deals are worrisome only if they amount to predatory pricing or anti-competitive behaviour. And both are the jurisdiction of the Competition Commission of India.

There too it would be a tough case to make given the miniscule size of the e-commerce industry today. Three percent of all retail.

Shut The Doors And Windows, The Roof Has Blown Off

All this gatekeeping, door shutting and window slamming might yet be justifiable if the government was seeking to protect small storekeepers. But the protection extends to large Indian players as well.

Indian-owned brick and mortar players—such as the deep-pocketed Reliance Retail—and by extension their e-commerce platforms remain unaffected. They can sell brands they own, offer deep discounts and strike exclusive deals with vendors...offline and online.

That begs the question – who is the government really protecting?

Same, Old Thing

Finally, none of what is written in this column is new. Those who follow FDI policy have known of this hypocrisy for years. And have lived with the consequences.